The role of gold in Islamic finance

    Gold bars

    The AAOIFI Shariah Standard on Gold developed in collaboration with the World Gold Council was a game-changer for the role of gold in Islamic finance. For the first time, the world’s leading Islamic scholars issued a collective Fatwa on the trading of gold, clarifying the transactions that are permitted and enabling the development of new and innovative gold-backed products. Since its launch, new products have been developed including exchange-traded funds (ETFs) and gold investment accounts, enabling consumers across the Islamic world to benefit from the wealth preservation properties of gold. ANDREW NAYLOR writes.

    Why is gold an attractive Shariah compliant asset class?
    Gold has long been valued for its distinctive investment benefits. Although gold is no longer the basis of the international monetary system, its status as a pillar of stability persists, a role which has become ever more important in today’s uncertain economic environment. Dr Hamed Hassen Merah, the former secretary-general of AAOIFI, said: “Gold has motivated civilizations through the centuries to aim higher and strive harder. Gold is more than just a financial asset; it is an integral component of human life”.

    Over the years, gold’s reputation for safety and stability has made it a mainstay for investors seeking to preserve their wealth, not least central banks around the world which consider gold to be the ultimate wealth preservation tool. New investors, such as pension funds, institutional investors and family offices recognize the benefits of gold.

    The reasons for this are clear:

    • Gold is a well-established, deep and liquid asset – the market of financial gold is over US$3.5 trillion, larger than all other Shariah compliant asset classes combined.
    • Gold is an effective diversifier. It exhibits little or no correlation to other asset classes in Islamic finance. This makes it a powerful diversification tool. This is even more important in Islamic finance where the breadth of available assets is smaller.
    • Safety – gold has no default risk and performs well in times of crises. It is the ultimate Shariah compliant safe haven asset.
    • Gold provides returns. Including gold in an Islamic portfolio can reduce volatility and help mitigate risks.

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    The views expressed in this article are the author’s own and do not necessarily reflect Saray Consultancy’s editorial stance.